Although the impact of the coronavirus on markets, economies and jobs is truly unprecedented, it doesn’t mean investing precedents don’t still apply.
Each week, Chief Cross-Asset Strategist Andrew Sheets, or a member of his team, offers perspective on the forces shaping the markets as well as insights on investment opportunities and risk across global asset classes.
Thoughts on the Market is also available on Apple Podcasts, Spotify, Google Play and other major podcast platforms. In addition, the most recent episode is available on Amazon's Alexa. Just ask Alexa to "Enable Morgan Stanley" or to "Add Morgan Stanley to my Flash Briefing."
For more about our Alexa skill, visit www.morganstanley.com/alexa
For more Ideas, visit www.morganstanley.com/ideas
Welcome to Thoughts on the market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, May 29th at 2:00 p.m. in London.
From the size of the economic decline to the scale of the policy response, there has been a significant amount of focus on just how unusual, extreme, and unprecedented current conditions are. The U.S. has seen job losses that are, literally, off the charts. And what seems like the closest economic parallel, the pandemic of 1918, was over 100 years ago.
But for investors, I'd caution against leaning too heavily into the idea that what we're seeing is something without a precedent or an investment playbook. While unique in many ways, in others this cycle has a surprising number of very usual characteristics.
Let's start with the conditions that persisted before the recession started. It's often the case that periods before the start of a recession and a bear market, periods that we'd refer to as "late cycle," share a number of common characteristics. As the economy overheats, unemployment falls to extremely low levels. Inflation tends to rise above trend and borrowing jumps. The Fed has often raised rates at some point in the previous 18 months to address these issues. Investor confidence and valuations are usually quite high given the apparent economic strength in a late cycle environment. And the bond market, sensing trouble, often inverts the yield curve.
All of those things were true over the second half of 2019 and at the start of 2020. Indeed, as you've heard myself and my colleague Michael Wilson talk about quite a bit on this program over the last nine months, market performance has had a late cycle flavor well before the first COVID-19 cases appeared, with bond yields declining and stocks being led by a narrow number of defensive and high quality companies. Both were very consistent with a market expecting growth to weaken.
Why does this matter? The first reason is we don't think investors should waste time with nostalgia for the pre COVID-19 market, which was showing many late cycle characteristics. The second reason is that if the entry into this recession was more normal than appreciated, maybe the exit will be more normal as well.
Indeed, just as there are usual patterns for market leadership, bond yields, and central bank activity ahead of a downturn and recession, there are often common strands after the market and economic data bottom. Credit markets often heal first. Smaller, cheaper and more cyclical assets, often the assets that do worst as a recession is beginning, start to do better. The bond market, balancing low current rates and expectations for better growth in the future, begin to steepen the yield curve.
With our expectations that global growth bottomed in April and that a new economic cycle is now starting, we think those early cycle strategies could apply again today. Every economic cycle is different, but common threads connect them. Based on what we've observed so far, we don't yet have a reason to believe that we need to throw out the old playbook.
Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people find the show.